New law to encourage pensioners to downsize their homes

A bill introduced to parliament last week is aimed at encouraging Australian pensioners to downsize their property to free up their larger homes younger families and bigger households.

Labor says the exemption is designed to give people more time to purchase, build, rebuild, repair or renovate a new principal home before their pension is affected.

Labor introduced the Social Services and Other Legislation Amendment (Incentivising Pensioners to Downsize) Bill 2022, which gives pensioners an additional 12-month asset test exemption on their home sale proceedings.

The social services minister, Amanda Rishworth, said she hoped “thousands” of older Australians would benefit from the change, which will reduce the impact on pension payments if homeowners make a windfall from their property sale.

“We don’t want people putting off downsizing to a more suitable home because they are concerned about the impact it could have on their payment rate and overall income,” she said.

“These changes will give pensioners more flexibility to find a suitable new home and it will hopefully free up larger housing stock for younger families who need it.”

If, as expected, the bill is passed, the changes will reduce the deeming rate and drop from 2.25 per cent to 0.25 per cent per annum on principal home sale proceeds intended to purchase a new home. The deeming rate is an 'assumed' rate of return on financial assets, which would be used in determining pension amounts.

Currently, when a pensioner or other eligible income support recipient intends to use the proceeds from selling their home to purchase or build another home, the proceeds are exempt from the social security assets test for up to 12 months.

Extensions for up to 12 months are available in the event of building delays, natural disasters or other extenuating circumstances.

Ms Rishworth’s office said that, under the current system, a couple that sold their home for $1m could see their pension reduced by $229 per fortnight, or a single pensioner selling their home for $600,000 could have their pension reduced by $143 per fortnight. The changes would see no reduction to pensions in either case.

More than money

Just 8,000 pensioners downsized their homes in Australia last year.

Nerida Conisbee, Chief Economist, Ray White Group, said financial hurdles aren’t the only obstacles keeping older people in big homes.

“There are also challenges for many to find more suitable smaller homes and of course, there is the emotional attachment so many have to where they live, nevertheless, reducing the financial burden of downsizing should go some way to encourage people to move.

“It may not lead to a flood of properties entering the market but we should see an uptick.”

Data on population by age group by suburb released last week by the Australian Bureau of Statistics provided a snapshot into where there are a lot of babies (Mickleham in Melbourne’s north) and the most middle-aged people (Bentleigh in Melbourne and the Noosa Hinterland).

It also provided details on where the most people aged 65-plus live, which offers an insight into where any downsizer incentives will provide the biggest uplift in availability of family homes. 

“While some suburbs may contain a lot of older Australians because there is a retirement community or aged care facility, the mix of where the most 65 plus years residents are is an interesting mix,” Ms Consibee said.

“It includes some very desirable suburbs such as Glenelg in Adelaide, Sandy Bay in Hobart and Brighton in Melbourne where there are likely lots of families keen to settle into big family homes.”

The Property Council of Australia has welcomed the Government's commitment to reducing the adverse financial impacts of downsizing for older people, describing it as a "win-win" for older homeowners and young families.

Ben Myers, Executive Director of Retirement Living at the Property Council of Australia, says the incentives for older Australians to move to homes that have less maintenance and are accessible will be very beneficial for older people wishing to remain living at home, independently, for longer.

“Incentivising older Australians to unlock their home equity and right-size into more suitable housing options, especially purpose-built age-friendly communities, is a wise move by Government,” Mr Myers said.

“Encouraging older Australians to right-size not only contributes to healthier ageing, but it’s also one of the smartest and fastest ways a government can boost much-needed housing supply for families.”

Council On The Ageing WA chief executive Christine Allen told media the legislation was good “in principle” but would probably not result in as many older senior Australians downsizing as hoped, with many wanting to age “in place”.

“These incentives are great for those who are in a position to take advantage of them: what we hear is downsizing is not always the cheaper option,” Ms Allen said.

She suggested the plan was more about freeing up housing stock than making life easier for older Australians.

“Who are they thinking of here - the younger Australians or the older Australians?”